WASHINGTON — The Consumer Financial Protection Bureau opened a public inquiry Thursday into student loan servicing practices that it says can make paying back loans “stressful or harmful.”
Private and federal student loan debt totals more than $1.2 trillion. Loans often are not serviced by lenders but by a company that processes monthly payments, assists borrowers with repayment options if they lose their jobs, and performs a variety of other tasks. Such service companies — among them Navient, Nelnet, American Education Services, and Great Lakes Higher Education Corp. — typically get a flat monthly fee per account.
Eight million student loan borrowers are in default, and the agency is concerned they weren’t told of available options that could have kept them out of the situation.
“Student loan servicers often make more money when they spend as little time as possible on each account, and they typically get paid more when a borrower is in repayment longer,” Richard Cordray, the director of the agency, said at a hearing in Milwaukee focused on student loan servicing. “So we are evaluating whether the typical methods of servicer compensation can jeopardize the interests of borrowers.”
The federal agency, which has oversight of the student loan industry, also has other concerns. It says consumers have complained that servicers have taken too long to process payments, lost paperwork, not fixed mistakes in a timely fashion, or didn’t correctly handle pre-payment of loans.
Advocates for the borrowers and college student loan administrators testified that they, too, hear such complaints. They said servicers are inconsistent in the quality of service they provide and often are inconsistent within their organization in the advice and help they give to struggling borrowers.
“What we want to see is that people get objective counseling,” said Deanne Loonin of the National Consumer Law Center.
Richard Hunt, the president and CEO of the Consumer Bankers Association, said his organization is looking forward to learning more about the effort. He said in a statement that its member banks are “100 percent committed to student success and are regularly working to ensure their borrowers are aware of all options available to them.”
There have been changes in recent years to address the quality in servicing credit cards and home mortgage loans. The agency is looking at how those industries are regulated and whether their regulations might be applicable to student loans.
The public has until July 13 to submit comments.
Dick George, president of Great Lakes Higher Education Corp., testified at the hearing that what’s often missing in discussions of student loan debt is how to help college dropouts with their loans. He said a large number of borrowers his group servicers that are delinquent or in default on their loans dropped out and are difficult to locate. These same borrowers, he said, are often low-income, minority or first-generation college students.
“When students drop out, they also tend to drop out of communication,” George said.